Crypto and Wall Street Sitting in a Tree…

One of the great threads of commentary in the cryptoasset space is the relationship between the traditional financial industry (i.e. Wall Street) and the ‘disruptors’ (i.e. cryptoassets). This relationship has many layers.

First, speak to anyone in crypto about “Finance”, and most likely they will tell you about how disillusioned they are about that industry. They will likely go further and tell you that blockchain is going to entirely replace the financial industry. This runs the gamut from replacing every part of the Wall Street institutions to ‘banking the unbanked’. Among many in the crypto commentariat there is an unspoken assumption that the blockchain spells the end of traditional finance. Odds are that they will then describe to you the way they have perfectly replicated some part of the Finance stack with their token. By contrast, talk to anyone still working on the Street, and they will relate the latest ICO scam they have come across, and then ask how they can get a job at a crypto hedge fund. Conversations on the Street veer back and forth like a driver on New’s Year Eve with one hand on their iPhone and the other on a half-finished bottle of Cristal.

Put simply, this is a complicated, co-dependent relationship.

For the past year (or more) the crypto world has been awash with the persistent rumor that there is “a wave of Wall Street money” that is perpetually ‘just about’ to coming pouring into the crypto markets. A quick web search will reveal hundreds of articles about this subject. Most of them come in the form of “Four things the crypto markets need for Wall Street money to come pouring in” which list the ‘few’ remaining structural elements needed to allow traditional, institutional investors to begin playing in crypto. These include things like custodians, settlement and other mundane elements that bond and equity traders have taken for granted for decades. We have touched on this in the past, and truth be told, we have an unpublished draft of one of these posts.

More recently, we have detected another thread of posts, these question whether Wall Street investing in crypto is really a good thing for crypto markets. These posts took on a new life with the launch of Bakkt, a crypto project backed by ICE, the owner of the New York Stock Exchange (NYSE) and other traditional analog trading markets. The theme of these posts is “Crypto is about breaking traditional finance, why would we want the Establishment to bring its broken practices to our pirate haven?” By our estimate, naming their currency “Bakkt” certainly looks at best like an unintended jab at the crypto markets, if not a deliberate insult. As in “Our currency is backed by trustworthy institutions, who backs your coin?”. However, we think the NYSE bungled this naming as most crypto participants came of age in the middle of the 2008 Great Financial Crisis, and so did not miss the insult. As we highlighted a while back there is a big generational gap in the crypto community, so much so, that most people we speak to in the market take it as axiomatic that the Street is inherently broken and corrupt. Bakkt’s messaging comes across much like a shipwrecked missionary proclaiming to the natives “In time, you misbegotten savages will know the Fullness of our Providence,” while the locals wonder what providence led the missionary to be shipwrecked in the first place.

The crypto zealots are waiting with bated breath for the liquidity that will overfill their coffers, while the Street spinners envisage a new asset class to plunder. We are clearly dealing with two very vocal communities of true believers operating on orthogonal planes of reality.

A more sober analysis points to some more mundane cycles that are driving this rhetoric. We are obviously in a crypto bear market now, with prices of everything down 50%++ from year-ago levels. When the market first turned down, crypto investors scanned the horizon for signs of the gods’ favor – outside investors coming to save their portfolios. As the market worsened, it became clear that no relief was coming. Any sails on the horizon could just as easily be a new band of reavers come to pillage. So there is now a widespread conspiracy theory that the big banks, “who are the biggest holders of Bitcoin”, are now trying to deliberately manipulate the market. Sometimes they are trying to push the price down so they can acquire a controlling stake (aka “The Hudsucker Proxy“), other times they are just trying to wreck this great threat to their dominance. Again, a lot of weaving taking place.

Nonetheless, the demand for crypto assets remains. We recognize that the markets do not reflect this, but we know from conversations with many investors and market participants that there is still a very large pool of capital looking for crypto investments. True, they have gotten much more discerning in where they place their bets, but they remain active and hungry. Maybe the market for crypto will evaporate entirely, going the way of South Sea Paper and Tulips. We do not think this is the case, but we are also no better informed than anyone else as to what all these crypto assets are truly worth.

So we expect much of the rhetoric around Wall Street and Crypto to continue. It looks clear now, that traditional institutional investors are going to enter the market gradually. This may be a generational timeframe, although we expect it will not take the long. It is equally clear that there are no single fixes that will magically open the floodgates.

That being said, we think it is inevitable that Institutional money will enter crypto markets. As we have noted repeatedly, we are believers in crypto. There are too many smart people pouring in time and money for this to go away completely. And if that is true, the Street will eventually come around and find ways to invest. After all, if there is one thing that is clear about the Financial Community it is that if there are returns to be had, they will take a piece of it.

This brings us to the final wrinkle in this saga. The fact remains that many people in the crypto are themselves refugees in one form or another from the financial industry. A very large proportion of crypto projects has at least one former banker or analyst onboard. In some cases, projects are entirely built by ex-traders and bankers. As much as many in this debate see two separate communities, in truth they are tightly bound together.